RBA Cuts Rate to 3.25% as Mining-Driven Growth Wanes: Economy

By Michael Heath -
Oct 2, 2012

Australia’s central bank resumed
cutting its benchmark interest rate to revive demand outside of
a resource boom that may crest at a lower level than previously
expected, sending the nation’s currency to a three-week low.

Governor Glenn Stevens and his board lowered the overnight
cash-rate target by a quarter percentage point to 3.25 percent,
the Reserve Bank of Australia said in a statement in Sydney
today. The decision to end a three-meeting pause was predicted
by nine of 28 economists surveyed by Bloomberg News, while the
majority had forecast no change.

“The peak in resource investment is likely to occur next
year, and may be at a lower level than earlier expected,”
Stevens said. “As this peak approaches it will be important
that the forecast strengthening in some other components of
demand starts to occur.”

Stevens’s gloomier outlook marked a reversal for a central
bank governor who said after a June speech that he felt the need
to do some “cheerleading” on the economy to rebut vocal
pessimists. The RBA chief today signaled weaker growth at home
and abroad, reflected in lower prices for the nation’s key
exports of iron ore and coal, as Europe’s fiscal crisis weighs
on global growth.

“The RBA has rejoined other central banks around the world
in what is becoming an increasingly coordinated policy response
to anemic growth,” said Jarrod Kerr, director of Australia
rates strategy at Credit Suisse Group AG in Singapore. “We
continue to forecast further easing in this cycle.”

Rate Probability

Traders are pricing in a 60 percent chance of another
quarter-point reduction next month, according to swaps data
compiled by Bloomberg. That would match the 50-year low of 3
percent at the height of the 2008-2009 global financial crisis.

The so-called Aussie dropped after the decision, trading at
$1.0309 at 5:31 p.m. in Sydney, compared with $1.0365 before the
announcement. It touched $1.0292, the lowest since Sept. 7.

In his statement, Stevens said the move to add to rate
reductions he made in May and June reflects signs of weakness in
the labor market, subdued inflation and a “modest” expansion
in the U.S. economy.

“Growth in China has also slowed, and uncertainty about
near-term prospects is greater than it was some months ago,”
Stevens said. “Key commodity prices for Australia remain
significantly lower than earlier in the year, even though some
have regained some ground in recent weeks.”

Surging Currency

The Australian dollar came within 5 U.S. cents of a record
high last month as the U.S. Federal Reserve and the European
Central Bank announced plans for open-ended asset purchases to
stave off economic stagnation, while China pledged increased
spending on infrastructure.

Even after today’s rate cut, Stevens has among the most
monetary firepower among major developed economies. Benchmark
rates are near zero in the U.S. and Japan, 0.5 percent in the
U.K., 0.75 percent in the euro area, 1 percent in Canada and 2.5
percent in New Zealand.

Since the RBA’s Sept. 4 meeting, government data indicated
a weaker economy: growth slowed in the second quarter to 0.6
percent from 1.4 percent in the first three months of the year;
employers unexpectedly cut payrolls in August; the nation
recorded a wider-than-expected trade deficit in July; and
business confidence declined.

China’s Slowdown

A quarter of Australia’s exports, making up about 5 percent
of gross domestic product, goes to China, and 60 percent of
those shipments are iron ore. China’s manufacturing contracted a
second month for the first time since 2009, a government survey
indicated yesterday.

The data add to signs that China’s growth rate is at risk
of reaching a 22-year low as the ruling Communist Party prepares
to begin installing a new generation of leaders next month.
China’s central bank has held off from adding to rate cuts in
June and July, partly on concern housing prices will rebound,
Chen Yulu, a People’s Bank of China academic adviser, said last
week.

“The board judged that, on the back of international
developments, the growth outlook for next year looked a little
weaker, while inflation was expected to be consistent with the
target,” Stevens said in today’s statement.

Tame Inflation

The RBA aims for annual consumer-price gains in a range of
2 percent to 3 percent on average.

Elsewhere in the Asia-Pacific region today, a report showed
South Korea’s inflation accelerated the most in three months in
September after typhoons damaged crops and a holiday boosted
demand for food.

Consumer prices increased 2 percent from a year earlier
after a 1.2 percent gain in August, Statistics Korea said today
in Gwacheon, south of Seoul, nine days before the central bank
decides interest rates. The median estimate in a Bloomberg News
survey of 12 economists was for a 1.8 percent gain.

In Europe today, a government report in Spain may show the
number of people registering for jobless benefits rose to the
highest level since February, a survey showed.

In the U.S. day ahead, Commerce Department figures may show
14.5 million total vehicle sales at an annual rate in September,
a survey of economists showed, little changed from the rate in
prior month.

Weaker Growth

Australia’s economy grew about 4 percent in the first half
of 2012 from a year earlier on the strength of resource-industry
investment and consumer spending. Still, weaker commodity prices
and an elevated currency prompted mining companies including BHP
Billiton Ltd. (BHP) and Fortescue Metals Group Ltd. (FMG) to put off
projects and cut jobs in the past two months.

“Credit growth has softened of late and the exchange rate
has remained higher than might have been expected, given the
observed decline in export prices and the weaker global
outlook,” Stevens said.

The Australian government is aiming to return its budget to
surplus this fiscal year and Treasurer Wayne Swan sought to take
credit for the central bank’s decision. “These cuts have been
made possible by our responsible budget policy,” he told
reporters in Canberra today.

The RBA lowered borrowing costs by 1.25 percentage points
from November to June to help shield the economy from Europe’s
debt crisis and slower growth in China.

Stevens will probably cut rates again next month, most
economists surveyed said. The RBA will lower borrowing costs by
a quarter point to 3 percent on Nov. 6, according to 12 of 21
economists polled by Bloomberg News.